Question

Long Answer Question:

In response to COVID-19 pandemic, Central Banks have reduced interest rates. Evaluate if reducing interest rates will completely help economies avoid deep recession.

Hint : Think why interest rate cuts might not be effective? Relate to challenges in context of developing economies.

Answer 1

In time of COVID-19, Interest rate are reduced to:

• Increased investment level
• Reduce saving in bank account Iinvestors will save less when rate of interest is less)

This is not effective because producers would not invest in this hard time where rate of return is very low and the time to cover the investment is increasing. Also, people will withdraw their savings from bank account even if the rate of interest was high because most of the people do not have any earnings and dependent upon their savings to survive.